Getting A Great Deal At The Warehouse Club

You’d have to be living under a rock to not know about the amazing growth of warehouse club shopping. I mean everyone has heard of Costco, right? However, many investors may not have heard of PriceSmart, Inc. PriceSmart is to the Caribbean and Central America what Costco is to the United States: A great place for great deals on hundreds of everyday items.

The Company’s first store opened in Panama in 1996 and went public in 1997. PriceSmart was actually started by Sol and Robert Price, the were founders of Price Club who many consider to be pioneers of the warehouse shopping concept (Price Club was acquired by Costco in 1993).

Below is a five-year trend analysis of several KPIs for PriceSmart, Inc.:

PSMTAnalysis.au 09222015

The key area of concern would be the Company’s debt trajectory; total debt up, cash interest paid and interest expense up, and total debt to assets, total debt to shareholders’ equity up.

While the above-mentioned path would be concerning if viewed in isolation, we must also look at its debt service ratio (i.e. EBITDA / cash interest paid) which while basically unchanged over the past five years is still significant at more than 40 times. Furthermore, the absolute values of debt to shareholders’s equity and debt to total assets are modest.

Apart from the positive performance of several common KPIs presented above (i.e. net sales – warehouse club in this regard -, gross margin, net margin, EPS etc.), two significant company-specific positive trends I would like to highlight are:

  1. Warehouse club sales per square foot increasing faster than actual warehouse square feet in operation.
  2. Stable membership renewal rate at 84% (valuable annuity-like revenue stream going on here).
  3. Strong growth in membership accounts bodes well for future sales.

There is no doubt that PriceSmart is a growth stock, but unlike many such stocks it pays a pretty decent dividend. The Company’s solid business model, attractive long-term prospects of its target markets, strong management, and ample room for expansion (Q3 report shows 36 warehouse clubs in operation versus 33 at the end of Q3 2014), lead me to believe that I can expect continued strong financial performance and rising dividends in the years ahead.

PriceSmart stock is down 12% YTD, but with a forward PE of about 22x it is definitely on the pricey side. However, I believe its performance and business model supports this premium valuation. Furthermore, I wouldn’t at all be surprised if PriceSmart gets scooped up by a larger company in the future.

What do you think of PriceSmart, Inc. as a long-term hold?

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